Report

Information acquisition and financial intermediation

Abstract: Informational advantages of specialists relative to households lead to disagreement between the two in an intermediated market. Although households can acquire additional signals to reduce the informational asymmetry, the additional information is costly, making it rational for households to limit the accuracy of the signals they observe. I show that this leads the equity capital constraint to bind more frequently, making the asset prices in the economy more volatile unconditionally. When disagreement between households and specialists is high, however, return volatility decreases. I find empirical evidence consistent with these predictions.

Keywords: financial intermediation; rational inattention; disagreement;

JEL Classification: E44; G00; G12; G19;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2014-06-01

Number: 571